February 26, 2007

In Bank of America v. Dahlquist, No. DA 06-0165, 2007 MT 32 (Montana S.Ct. Feb. 7, 2007) (available from http://fnweb1.isd.doa.state.mt.us/idmws/custom/sll/sll_fn_home.htm), the Montana Supreme Court affirmed a trial court's denial of a motion by a credit card holder to confirm an arbitration award against an issuer, because the procedure producing the award failed to conform to the arbitration agreement.

The Court, in a 7-0 decision written by Justice W. William Leaphart, reasoned that defendant Doc Dahlquist's use of the National Arbitration Council, an ADR provider, for an arbitration in which Dahlquist received a $9,170 award, didn’t conform to the arbitration agreement.

According to the Court, Dahlquist’s agreement with plaintiff Bank of America--which filed suit against Dahlquist more than a year after the arbitration award to collect a debt--called for use of a different, specific arbitrator. As a result, the trial court held that the NAC arbitration wasn’t valid, and the Bank of America was “under no obligation to initiate procedures to have the invalid arbitration vacated.”

On Dec. 30, 2004, the bank filed a complaint alleging that Dahlquist owed more than $9,600 in credit card debt pursuant to a “Cardmember Agreement.” Dahlquist subsequently filed a motion to dismiss, and a motion to confirm an arbitration award.

NAC issued Dahlquist’s award for $9,170 on the debt that the bank claimed was owed by Dahlquist.

NAC had sent the bank two notices about the arbitration proceedings, but hadn’t received a response. The bank didn’t move to vacate the award, and did not challenge the award until it responded to Dahlquist's motion to confirm, almost 17 months after the award was issued.

The arbitration agreement between the parties lists “J.A.M.S./Endispute (JAMS)” as its arbitrator, according to the opinion. The agreement, the opinion states, provides that if JAMS is unwilling or unable to serve as arbitrator, “we may substitute another national arbitration organization with similar procedures.” The agreement also provides that it is governed by the Federal Arbitration Act.

The question for the Court was whether the state district court correctly denied Dahlquist's motion to confirm when the arbitration award was issued by an arbitrator other than the one specified in the arbitration agreement, even though the bank failed to dispute the award within 90 days.

The Montana Supreme Court backed the trial court.

Dahlquist’s appeal focused in part on Montana's Uniform Arbitration Act, which provides that a motion to confirm must be granted by a district court unless, within 90 days, the award is challenged.

The defendant argued that the state act also provides that the 90-day challenge opportunity applies to an allegedly invalid arbitration where “there was no arbitration agreement.” In other words, Dahlquist argued that the bank had 90 days to challenge the award even though it claimd the award was invalid because the wrong arbitrator was used.

But the Court disagreed with Dahlquist's assessment because it found that since the arbitration specifically states that it is regulated by the FAA, the Montana arbitration statutes did not govern.

Contrary to Montana's Act, the FAA “does not recognize a motion to vacate an award for the reason that ‘there was no arbitration agreement,’” the court held.

The court found that under the FAA, “where parties have not agreed to arbitrate, or where the arbitration does not follow the format provided for in the arbitration agreement, the arbitration award is invalid ab initio.” See MCI Telecommunications Corp. v. Exalon Industries Inc., 138 F.3d 426, 430 (1st Cir.1998).

Correspondingly, the court reasoned that since the NAC was not the arbitrator specified in the arbitration agreement, and the Bank of America did not consent to arbitration under the NAC’s auspices, the arbitration award was invalid.

The Court found that the “FAA time limitation was thus not triggered, and the [bank] is not bound by the award, even though it failed to challenge it within three months.”